3. Controlling your Credit Score

Credit scores are calculated using many different variables, outlined below. Many people believe the incorrect blanket statement that “opening new cards will lower your credit score,” yet the same blanket statement is made about closing credit cards! Truth is, opening or closing a credit card can be either good or bad for your credit score, depending on your own credit history and future.

Here are the factors that determine credit score calculations, and their approximate weight in the calculation:

35 % = Payment history

  • What it is: You get rewarded for being a responsible borrower and penalized for late payments and delinquent accounts.
  • How to win: Pay your bills on time and don’t declare bankruptcy.
  • My policy: 175/175 on my monthly payments since 2010.

30 % = Outstanding debt and debt utilization

  • What it is: You get rewarded for low debt utilization percentage (sum of all money owed / sum of all of your credit limits) and penalized for maxing out credit cards.
  • How to win: Pay your bills in full to keep your balances away from their credit limits. Try to maintain high credit limits and low balances on your cards. This minimizes your debt utilization percentage, which should be 1-10% for optimal credit scores.
  • My policy: Keep my debt utilization percentage well below 10%.

15 % = Age of credit

  • What it is: You get rewarded for having a higher average age of your open credit accounts.
  • How to win: Keep your no-fee credit cards open forever. Don’t close your oldest accounts. Don’t apply for too many new cards at once. Close inactive/useless cards after 8-9 months.
  • My policy: See above, and have my parents add me as an “authorized user” on their most ancient accounts so my average credit age goes up (I don’t actually use their accounts, and I am sure that they pay their bills on time, so I feel comfortable doing this. You must assess your own risk if you decide to do this with somebody).

10 % = New credit inquiries

  • What it is: With each new credit card you apply for, the bank requests to look at your credit score. This is called an “inquiry” and you get marginally penalized for them (each one each one reduces your credit score, usually from 3 to 5 points). Inquiries remain a factor in your credit score calculation for 3 months, and for up to 2 years in the text of your full credit report.
  • How to win: Minimize the amount of inquiries being factored into your credit score.
  • My policy: Wait at least 3.5 months between credit card applications. Every 3.5 months, apply for 1-4 new cards in the same day (because each bank’s request for credit will not be recorded until the following day). Never apply for more than 2 cards from the same bank in any given 3.5-month churning cycle.

10 % = Types of credit and number of accounts

  • What it is: You get rewarded for the diversity of your accounts (loans, credit cards, mortgages, etc.) as well as the total number of accounts. It is their way of verifying that your responsibility, as calculated in other factors, is not a fluke.
  • How to win: Open a reasonable amount of credit cards. If you have an open loan, well, good for you. If not, don’t open one just to improve your credit score.
  • My policy: Never close credit card accounts within 3 months of opening them. Keep them open at least 3 months, ideally 6+ months.

Much of this info comes from the free credit monitoring website www.creditkarma.com, which I recommend you use to track your own approximate credit score over time.

Next page: My Churning Strategy 

2 Comments

  1. dynoden1

    What I wonder about is what is the optimal # of credit cards that someone should have to maintain a good credit score, and what is the optimal # of no fee cards to keep open that are older with higher than average age? Also, if you have multiple credit cards and keep them inactive, how does that affect your credit score? I am middle aged with a good income and very good credit score.

    • @Dynoden1: There is no optimal number of total cards for a good score. You should have at least a couple of no-fee cards that you keep open forever so they skew your credit age to the older side. But you don’t want to overdo it because it takes time for them to get old, and you’ll hurt your credit score in the near term. There is no penalty for having your cards inactive, as long as you keep them open, but if a bank sees a pattern of spending just to the sign-up bonus and then closing the card, then they might close all your accounts. So you should try to slightly disguise your churning habits, looking at it from the bank’s point of view.

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